Face facts head on and be upfront with staff to retain trust

When Barnardo’s found it necessary to change its final salary pension provision, involving staff and trade union representation was deemed key to retaining trust

Barnardo’s has provided pensions for its staff on a final salary basis since 1918 and risk was never really an issue for most of this time. The 2003 valuation, however, brought, for the first time, a large deficit (roughly one-third of the assets) but Barnardo’s could not find the necessary funds to deal with it.

Approximately 70% of Barnardo’s staff come from local authorities and, in order to effectively recruit, the provision of a final salary scheme was deemed essential. Barnardo’s was able to provide £10 million from reserves as a one-off payment. It was also necessary to reduce future liabilities through a series of measures that gave existing members options relating to normal pension age, accrual rates and contribution levels. All new staff had a normal pension age of 65 years.

A consultation period followed, during which time 41 seminars were held around the UK. Members were asked to choose an option appropriate to their own circumstances, with the majority believing that increasing their normal pension age but retaining the same accrual rate and contribution level as before was preferable. The then trustees asked the actuary to conduct a mini valuation every six months in order to monitor the ongoing situation.

In 2006, the next triennial valuation showed a smaller deficit than in 2003 but, more significantly, due to the new funding requirement, the ongoing cost of providing benefits rose substantially. Once again, Barnardo’s had to deal with costs it could not afford. Unfortunately, this time there was no perceivable way of retaining the final salary arrangements without substantially increasing members’ contributions but this would not have reduced the ongoing risk associated with longevity and lower-than-expected investment returns. It was decided that the only way forward was to provide a stakeholder scheme for all new staff from 1 July 2007 and move to a career average revalued earnings (Care) scheme for existing members with a reduced accrual rate.

Even before the valuation results were known, Barnardo’s decided to sit down with trade union Unison heads to forewarn them of what it thought might happen. Following publication of the results, it provided Unison with copies of the Barnardo’s accounts and the valuation assumptions in order that its experts could verify the reasoning behind the proposed changes.

Barnardo’s charity trustees were once again prevailed upon to release a £10 million lump sum from the reserves and a three-month long consultation period was held with all staff. During this time, 56 seminars were held round the UK. In addition to booklets outlining the changes, Barnardo’s set up a pensions help and information line utilising both the telephone and email systems, a dedicated web page on the intranet system and also produced (in conjunction with Anthony Hodges Consulting) a CD-Rom containing a presentation and pension modeller. A new booklet was produced and despatched to all members of the Care scheme in time for the 1 July 2007 start date.

To enable the trustees to maintain their confidence in the employer’s ability to support the scheme, an agreement was reached with the pension trustees for Barnardo’s to commit contingent assets to the scheme if its net assets moved outside a pre-agreed range. This ‘corridor’ is reviewed every six months.

Since then, the trustees have looked at reducing investment risk by introducing a swaps and liability-driven investment strategy. At the time of writing, contracts were shortly to be signed with the relevant investment managers. The new benefits structure combined with the new investment strategy seeks to reduce risk going forward in order to provide comfort for both trustees and Barnardo’s.